Econ

financial system

the group of institutions that helps match the saving of one person with the investment of another

Financial markets

institutions through which savers can directly provide funds to borrowers

Examples of financial markets

The Bond Market, The Stock Market

bond

certificate of indebtedness

stock

claim to partial ownership in a firm

Financial intermediaries

institutions through which savers can indirectly provide funds to borrowers

Examples of Financial intermediaries

Banks, Mutual funds

Mutual funds

institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

Different Kinds of Saving

Private saving, Public saving

Private saving

The portion of households' income that is not used for consumption or paying taxes = Y-T-C

Public saving

Taxes-G

National saving

private saving + public saving (Y - T - C) + (T - G) = Y-C-G the portion of national income that is not used for consumption or government purchases

Solve for I:

I = Y-C-G = (Y-T-C)+(T-G)

Budget Surpluses

an excess of tax revenue over govt spending = T-G = public saving

Budget deficit

a shortfall of tax revenue from govt spending = G-T = -(public saving)

Saving

investment in a closed economy

Investment

purchase of new capital

In economics,__________ is NOT the purchase of stocks and bonds!

investment

Public saving, if positive,______ to national saving and the supply of loanable funds.
If negative, _____it national saving and the supply of loanable funds.

adds, reduces

An increase in the interest rate makes saving more attractive so it then increases

the quantity of loanable funds supplied.

The supply of loanable funds comes from

saving

A fall in the interest rate reduces the cost of borrowing which means...

increases the quantity of loanable funds demanded(more people want to borrow)

Tax incentives for saving(putting money into bank) increase __________

the supply of L.F.

A budget deficit reduces

national saving and the supply of L.F

When there is less L.F, interest rates...causing a .... in investment

increase decrease

The govt borrows to finance its deficit, leaving...

less funds available for investment, called crowding out.

budget deficits reduce the economy's...

growth rate

Financial markets help allocate the economy's scarce resources to their....

most efficient uses

The demand for funds comes from...

investment

physical capital

manufactured resources

human capital

improvement in the labor force

financial capital

funds from savers(lenders) available for investment

The sale of stocks to raise money is called

equity finance

the sale of bonds to raise funds

debt finance

A mutual fund is

is a financial institution that stands between savers and borrowers. is a financial intermediary. allows people with small amounts of money to diversify their holdings

Banks play a role in creating an

asset that people can use as a medium of exchange

A bond buyer is a

saver. Long term bonds have more risk than short term bonds

identity that shows that total income and total expenditure are equal

Y = C + I + G + NX

T - G

public saving

Y - T - C

private saving

national savings equal

public saving + private savings

When a country saves a larger portion of its GDP than it did before, it will have

more capital and higher productivity

Suppose a country's debt is smaller in 2011 than in 2010,we would expect

lower interest rates in 2011 which increases greater investment in 2011 than in 2010

We interpret the term loanable funds to mean the flow of resources available to fund private investment

true

Lenders(savers) buy bonds and borrowers sell them

true

Generally, if people begin to expect a company to have higher future profits, the price of the company's stock will begin to decrease

false

If there is a surplus of funds, interest level would be...

above the equilibrium

An increase in the budget deficit shifts the demand for loanable funds to the right

false

If the government's spends more than in takes in, it would ___ bonds

sell bonds directly to the public

loanable funds means the same thing as

investment

If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,

there is a shortage and the interest rate is below the equilibrium level, shortage=below

If the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded, the interest rate is

above equilibrium, surplus=higher

If the demand for loanable funds shifts to the right, then the equilibrium interest rate

and quantity of loanable funds rise.

Other things the same, a government budget deficit

reduces both public and national saving

Crowding out occurs when investment declines because

a budget deficit makes interest rates rise.

We interpret the meaning of "loanable funds" as the

flow of resources available to fund private investment

If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs

These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower.

If there is a surplus of loanable funds, then

the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium

Other things the same, when the interest rate rises,

people would want to lend more, making the quantity of loanable funds supplied increase.

A bond buyer is a

saver. Bond buyers may sell their bonds prior to maturity.

A government budget deficit affects the supply of loanable funds, rather than the demand for loanable funds, because

in our model of the loanable funds market, we define "loanable funds" as the flow of resources available to fund private investment.

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financial system

the group of institutions that helps match the saving of one person with the investment of another

Financial markets

institutions through which savers can directly provide funds to borrowers

Examples of financial markets

The Bond Market, The Stock Market

bond

certificate of indebtedness

stock

claim to partial ownership in a firm

Financial intermediaries

institutions through which savers can indirectly provide funds to borrowers

Examples of Financial intermediaries

Banks, Mutual funds

Mutual funds

institutions that sell shares to the public and use the proceeds to buy portfolios of stocks and bonds

Different Kinds of Saving

Private saving, Public saving

Private saving

The portion of households’ income that is not used for consumption or paying taxes = Y-T-C

Public saving

Taxes-G

National saving

private saving + public saving (Y – T – C) + (T – G) = Y-C-G the portion of national income that is not used for consumption or government purchases

Solve for I:

I = Y-C-G = (Y-T-C)+(T-G)

Budget Surpluses

an excess of tax revenue over govt spending = T-G = public saving

Budget deficit

a shortfall of tax revenue from govt spending = G-T = -(public saving)

Saving

investment in a closed economy

Investment

purchase of new capital

In economics,__________ is NOT the purchase of stocks and bonds!

investment

Public saving, if positive,______ to national saving and the supply of loanable funds.
If negative, _____it national saving and the supply of loanable funds.

adds, reduces

An increase in the interest rate makes saving more attractive so it then increases

the quantity of loanable funds supplied.

The supply of loanable funds comes from

saving

A fall in the interest rate reduces the cost of borrowing which means…

increases the quantity of loanable funds demanded(more people want to borrow)

Tax incentives for saving(putting money into bank) increase __________

the supply of L.F.

A budget deficit reduces

national saving and the supply of L.F

When there is less L.F, interest rates…causing a …. in investment

increase decrease

The govt borrows to finance its deficit, leaving…

less funds available for investment, called crowding out.

budget deficits reduce the economy’s…

growth rate

Financial markets help allocate the economy’s scarce resources to their….

most efficient uses

The demand for funds comes from…

investment

physical capital

manufactured resources

human capital

improvement in the labor force

financial capital

funds from savers(lenders) available for investment

The sale of stocks to raise money is called

equity finance

the sale of bonds to raise funds

debt finance

A mutual fund is

is a financial institution that stands between savers and borrowers. is a financial intermediary. allows people with small amounts of money to diversify their holdings

Banks play a role in creating an

asset that people can use as a medium of exchange

A bond buyer is a

saver. Long term bonds have more risk than short term bonds

identity that shows that total income and total expenditure are equal

Y = C + I + G + NX

T – G

public saving

Y – T – C

private saving

national savings equal

public saving + private savings

When a country saves a larger portion of its GDP than it did before, it will have

more capital and higher productivity

Suppose a country’s debt is smaller in 2011 than in 2010,we would expect

lower interest rates in 2011 which increases greater investment in 2011 than in 2010

We interpret the term loanable funds to mean the flow of resources available to fund private investment

true

Lenders(savers) buy bonds and borrowers sell them

true

Generally, if people begin to expect a company to have higher future profits, the price of the company’s stock will begin to decrease

false

If there is a surplus of funds, interest level would be…

above the equilibrium

An increase in the budget deficit shifts the demand for loanable funds to the right

false

If the government’s spends more than in takes in, it would ___ bonds

sell bonds directly to the public

loanable funds means the same thing as

investment

If the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,

there is a shortage and the interest rate is below the equilibrium level, shortage=below

If the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded, the interest rate is

above equilibrium, surplus=higher

If the demand for loanable funds shifts to the right, then the equilibrium interest rate

and quantity of loanable funds rise.

Other things the same, a government budget deficit

reduces both public and national saving

Crowding out occurs when investment declines because

a budget deficit makes interest rates rise.

We interpret the meaning of "loanable funds" as the

flow of resources available to fund private investment

If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs

These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower.

If there is a surplus of loanable funds, then

the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium

Other things the same, when the interest rate rises,

people would want to lend more, making the quantity of loanable funds supplied increase.

A bond buyer is a

saver. Bond buyers may sell their bonds prior to maturity.

A government budget deficit affects the supply of loanable funds, rather than the demand for loanable funds, because

in our model of the loanable funds market, we define "loanable funds" as the flow of resources available to fund private investment.

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